Q: My church has been hit hard financially because of COVID and launched a special fundraising campaign to cover the budget shortfall. I have undeveloped land that has attracted some interest over the past six months. I think it will sell for $375,000 and I purchased it for $90,000. I am willing to contribute the land to the church. This will fix their 2020 budget shortfall and should also allow them to fund the budget for 2021 even if the current giving level continues. I do not want to sell because I will have to pay a large capital gains tax. I thought we had this all worked out and I had engaged an appraiser to support the claimed tax deduction. The treasurer, who I consider a Nervous Nellie, then convinced the board that it was too risky to accept the gift of the land. His reasoning is the church will be responsible for carrying costs and the land might not sell for some time. The “compromise” suggested by the board is that I arrange a buyer for the land and transfer the land right before it sells. My tax preparer tells me this is very risky and I might be treated as the seller even if the sale occurs after the gift. I am ready to give up on this whole idea if they will not work with me on the gift. Do you think I would be OK if I lined up the buyer before the gift?
A: I agree with your tax preparer that this plan could create significant tax risk. It is a difficult issue to resolve because the answer depends on how far your negotiations have gone before the gift.
The board’s plan would create a form where the sale occurred after the transfer was made to the church. This form would allow you to report a gift. You would need a qualified appraisal to satisfy the tax requirements for a deduction.
The form allows you to avoid the capital gains tax. The church will also avoid this tax because it is a tax-exempt organization.
The substance of the transaction may be different from its form. By this, I mean it may appear that the land has already been sold before the gift, even if the closing occurs after the gift.
I meant to use the word “may.” The phrase “may not” could also apply. Which fits depends on how far the sale negotiations have progressed before the gift. There is no bright line for “too far.”
Some tax advisers would say that until you sign a contract to sell the land there is still time to give it to the church. This makes sense because if there is no contract to sell there is no “done deal.”
The problem is that there are several prominent court decisions that hold that negotiations to sell can go too far even if there is no binding contract to sell.
The most prominent of these cases is a 1945 Supreme Court decision, Court Holding Company. Court Holding negotiated the sale of real estate, even accepting earnest money from the buyer.
When the company asked a lawyer to draft a contract of sale, it was advised that the tax consequences would be better if the shareholders sold the property. The deal was restructured as a sale by the shareholders.
Court Holding argued that without a written contract it could not be forced to sell. The Supreme Court held that the sale was effectively concluded when the company went to the lawyer to formalize it. Substance controlled over form.
Other cases approach the issue the same way – did the negotiations go “too far” so that the sale was effectively consummated before the formalities of sale were completed.
My concern in your question is that the treasurer seems to want a “done deal” before the church will accept the gift. In the end, the answer will depend on how far the negotiations had progressed.
If you sign a contract to sell and then assign it to the church, you have little chance of success. But even if the negotiations are done but for the signing, you still have a weak case.
Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.
